Why MF distributors go online

The recent capping of upfront commissions that fund houses can pay distributors is one piece of the overarching theme of lowering costs to buy and sell mutual funds (MF) that could shape the way they are bought and sold. One trend is that some distributors are slowly shifting online. Sanjay Santhanam, a Chennai-based MF distributor (he used to head the marketing and sales departments at Canara Robeco Asset Management Co. Ltd and at Sundaram Asset Management Co .Ltd before that), doesn’t prefer filling out forms and paying his clients visits just to get their signatures. He says that time is of the essence; he’d rather spend it on his research and tracking markets. So he uses the Internet—an MF platform—to get his clients to buy the schemes that he recommends, online. Personal meetings are limited, which allows him to try and get clients from other geographies, sitting in Chennai. The idea is to save on costs by keeping client interaction minimal, and piggybacking on a platform’s technology, while focusing more on client servicing. At present, about 30% of his transactions are online but he hopes to push this up to 70% over the next year or two. When Santhanam started out in 2012, he was managing money worth a couple of crores. That moved up to around 30 crore in 2014 and now stands at about 50 crore. Will online MF platforms like the one that Santhanam uses, take off?

Presently, there are a handful of such online platforms. Some of the more prominent ones include Next Advisors, NJ India Invest Pvt. Ltd (one of India’s largest MF distributors), stock exchange platforms like BSE StAR MF and NSE–NMFII, and those run by Fundsindia.com and iFast Financial (two online portals where investors can also independently buy and sell MFs). MF Utility (MFU)—an online web-based tool by the Association of Mutual Funds of India (Amfi; the MF industry’s trade body)—is more of an order routing mechanism than a platform as such. The MFU still requires a paper trail, but its next phase will bring about online capabilities. Stock exchange platforms are end-to-end platforms, while others are aggregators that bring together distributors on a technology platform and ride on full-fledged platforms.

Typically, online platforms remove the need for physical intervention and form filling. Once the distributor comes on board and opens her own account, she can select schemes on behalf of her client and a web link goes to the client. The client then has to confirm the order (and check if the schemes are the same ones that were agreed upon, and other details) and make the payment. Every time the client has to make a payment to buy MF units, she has to log into her Internet banking account. Money goes out of the client’s account and straight to the fund house, and the client gets her units.

At the core, that’s how most platforms facilitate a paperless transaction. Over and above this, different platforms can have subtle differences. The NJ and Next Advisors platforms, for instance, entail that the investor buys and sells the fund herself. In these platforms, upon onboarding, the distributor gives the client a login name and password. The investor has to log onto the platform, select funds that she wishes to buy and use the Internet banking facility to make the payment. Additionally, NJ’s platform allows the distributor to get a power of attorney (PoA) from the client (subject to an upper limit). Using the PoA, the distributor can move the money from the client’s account using the auto-debit facility. This is in addition to buying and selling units in the offline mode, and filling in forms and visiting the registrar and transfer agent’s office to submit the same. Units are bought on the basis of NJ’s Amfi Registration Number (ARN). This means that although every sub-broker in the NJ network has their individual ARN, only NJ’s ARN gets finally recorded in the fund house’s records. Approximately 25% of NJ’s business comes through its online channel.

Next Advisors is purely a technology platform built by a few distributors. It enables a whole network of MF agents to offer schemes online to distributors. Here, the transactions get recorded in the distributor’s own ARN.

The other type of platforms are those run by the stock exchanges. On offer since December 2009, stock exchange platforms didn’t initially take off because, in the early days, they allowed only stock brokers to sell MFs to clients. Eventually, in 2013, laws were rewritten to allow independent financial advisers (IFAs) to enter the platform. But there was a common irritant that persisted; units bought and sold could only be in the dematerialized format. That changed in December 2014 when the Securities and Exchange Board of India (Sebi) allowed non-demat transactions on stock exchanges.

This could change the way MFs are bought or sold in a big way. Those investors who are not inclined to open a demat account can now invest through the exchange platforms, if their distributors are members there. In fact, the NSE-NMFII also has plans to link your Permanent Account Number to its backend database that will pull out all your previous MF transactions, even if you have purchased units outside the NSE. This will enable your distributor to give you a holistic view of your portfolio.

While distributors’ income has come down due to regulatory tightening, their need to invest big sums of money to build capabilities has also reduced with such platforms. Most allow them to generate various reports for their clients to give them a better understanding.

But the biggest game changer will come when Sebi allows advisers to invest client’s money in direct plans, but under the adviser’s code. Advisers can then use these platforms, offer cheaper direct plans (with lower expense ratios), service them on such investments and charge fees at the same time.